Commoditization = Deflation

Apple's slumping sales growth in China re-energized discussions on the commoditization of smartphones: the basic idea is that once devices, services, goods, platforms, etc. are interchangeable and can be produced/generated anywhere, they are effectively commodities and their value declines accordingly.

In the case of Apple's iPhone, many observers see diminishing returns on the latest model's features as the price point (around $1,000) now exceeds what many customers are willing to pay for the status of owning an Apple product and the declining differentiation of the iPhone when compared to other smartphones available at a fraction of the iPhone's price.

Commoditization doesn't just affect the top tier of the food chain; it affects the entire food chain. The commodity $400 smartphone has diminishing returns over the commodity $200 smartphone, and the $200 smartphone has diminishing returns over the commodity $100 smartphone.

Commoditization ravages price and profitability. Once the production facility is paid for by the first run, the cost basis of future production drops, enabling the producer to reap profits even as price plummets.

This is why perfectly good tablets cost $35 wholesale in some Asian markets.

No wonder hedge funds are closing left and right; investing is being commoditized by passive funds, funds managed by software, etc.

Commoditization is inherently deflationary as prices and profits are pushed down along the entire food chain.

As Marx explained in the 19th century, the only way to preserve pricing power and profits is to eliminate competition by establishing a monopoly or cartel. And indeed, the sectors which continue to jack up prices and rake in outsized profits are cartels: healthcare, national defense, pharmaceuticals, higher education, etc.

Charles Hugh Smith, has been an independent journalist for 22 years. His weblog, OfTwoMinds.com, is a daily compendium of observations and analysis on the ...
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Charles Hugh Smith, has been an independent journalist for 22 years. His weblog, OfTwoMinds.com, is a daily compendium of observations and analysis on the global economy and financial markets, as well as notable political, social and cultural trends. Charles has authored a number of books across several genres, including the recent Survival+: Structuring Prosperity for Yourself and the Nation.